United Nations Trade Panel Pushes for New Currency

Early this week, the Geneva-based UN Conference on Trade and Development (UNCTAD) calls for a new global reserve currency to replace the US dollar.

It is indeed a tough year for the greenback. A few months ago, emerging countries Brazil, Russia, India and China rallied for a new currency to take the dollar’s place. Analysts and strategists however, concluded that the US dollar will remain as the global reserve currency but it will definitely continue to face tremendous pressure as more emerging countries and influential political figures insist on replacing the greenback as reserve currency.

The report issued Monday said “the world economy would be better off with a system where governments intervene when necessary to either defend or depress their own currencies.”

As quoted from Wall Street Journal: "A viable solution to the exchange-rate problem would be a system of managed flexible exchange rates targeting a rate that is consistent with a sustainable current-account position, which is preferable to any 'corner solution.' But since the exchange rate is a variable that involves more than one currency, there is a much better chance of achieving a stable pattern of exchange rates in a multilaterally agreed framework for exchange-rate management," said the U.N. body.

The report also suggests that the dollar's role in international finance is coming to an end.

Why is there a need to replace the dollar as reserve currency?

For years, the United States has been fighting hard to maintain the dollar's value. But with the financial crisis in tow, fears of inflation arose especially that of China, one of the biggest holders of dollar assets, mostly in the form of U.S. Treasury debt.

And as reported by Reuters, the accumulation of excessively large dollar reserves can then lead to asset bubbles. Some economists contend China's recycling of reserves into U.S. Treasury debt kept U.S. interest rates low and contributed to the housing bubble behind the global downturn.

In an interview with Bloomberg, UNCTAD director Heiner Flassbeck said, “There is a much better chance of achieving a stable pattern of exchange rates in a multilaterally-agreed framework for exchange-rate management.” Thus, “An initiative equivalent to Bretton Woods or the European Monetary System is needed.”

The United Nations on the other hand admits that this cannot be done overnight because it requires international consensus and multilateral institution building.

To view UN Conference on Trade and Development’s report in PDF format, click here.

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